The Good New Days

Those were the good ol’ days!

The Wall Street Journal:

“US economic output tumbled in the first quarter as businesses cut back sharply, marking the nation’s worst six-month contraction in 51 years…

“The 6.1% annualized decline in gross domestic product came as the home-building sector continued to deteriorate, business investment in buildings and equipment plunged and firms drew down inventories at the fastest pace since the start of the decade.”

But wait…51 years ago was the decline of ’57-’58. According to our sources, that recession – though frightening when it began – only took 3.2% off the nation’s GDP. And it ended after six months.

Perhaps we should look back and see what heroic acts on the part of Congress and the Fed cured that recession so quickly.

What’s this? The record shows that Fed did almost nothing. According to Jim Grant, though the Fed cut its key rate to 2.25%, the total monetary stimulus provided by the Fed during that period amounted to zero. On the fiscal side, however, Congress boosted spending, adding to the deficit the equivalent of 3.2% of GDP.

In other words, faced with an equivalent downturn, the feds of yesteryear cured the recession of ’57-’58 – or it cured itself – with a total exertion of barely one-tenth what they are doing today.

But it was a different world back then. To make a long story short, the great boom was just beginning…the Empire was still rising…its currency was still backed by gold…and its books – both federal government registers and national trade accounts – were in balance.

That was also when Detroit’s invitation to “see the USA in a Chevrolet” still had advertising punch. We remember the ads on television…those sleek new automobiles (Detroit came out with brand new models every year)…with their big tailfins and their wide, comfy ride…tops down…roads open…no seat belts – those were the good old days.

General Motors was the biggest and most profitable automobile company on the planet…an icon of American capitalism and its industrial success.

But what’s this? Today’s news tells us that not only is GM to be nationalized, it and Chrysler are to be taken over by the UAW! Ah…at last…Marx’s dream has come true. The workers – at least those in the United Automobile Workers union – are taking over the means of production. Between the government and the unions, General Motors will be almost entirely in the hands of the sweating proletariat.

To that end, a dear reader wrote in this morning and said: “GM will not disappear. Just a slight change to what it represents: Government Motors.”

Along with the story – in the Financial Times – comes a photo of the UAW on strike in 1937. It’s a ‘sit down’ strike…so we see them sitting down in the factory…comfortably resting on Chevy seats while reading the paper.

But these are the good new days.

Imagine if we’d had to write these daily reckonings during the Eisenhower years. What would we have said? We couldn’t rant about government debt – the feds were running balanced budgets and paying down the debt from WWII. We couldn’t fret about trade deficits either – we were running huge trade surpluses. Nor could we wag our finger at consumer spending and personal debt. People were spending money – but they were earning it. The savings rate was healthy. And total debt stood at only about 150% of GDP. Now it is close to 360%.

What a dreary time. There was nothing and no one for a sensible economist to laugh at. Vice President Richard Nixon pledged to fight the recession of ’57-’58 with “whatever action is necessary to stop the economic downturn and stimulate the recovery of the recession.” But, the government’s efforts were very modest. Besides, it was still 14 years before Nixon took out his knife and stabbed the gold-backed monetary system in the back. Back then, the people were freer…but the government was more constrained. There were still limits on what mischief a reckless government could get up to. A country with a pile of dollars back in the ’50s had no worries. It could turn them in to the U.S. Treasury and receive gold at the statutory rate. Its only risk was that the foreign treasury might run out of gold before it got there. This was no risk in the case of the United States of America – it had cleverly sucked in the majority of the world’s gold in exchange for goods and services (hint…many of them made loud noises) during the two world wars.

But all of that has changed now. No one wants to ‘see the USA in a Chevrolet’ anymore. They prefer BMWs. And hybrids made by the Japanese. Now, the U.S. government runs the biggest deficits in history – intending to buy its way out of a recession that, so far, is no worse than the Eisenhower recession of ’57-’58. Next week, the feds will hold the largest auction of Treasury debt in history. They will raise $71.6 billion…on their way to doubling the U.S. national debt over the next five years. The U.S. savings rate is nowhere near as high as it was in the ’50s and ’60s…but it least it has one. Savings disappeared completely during the final years of the Bubble Epoque. Now, Americans are saving 5% again.

The savings rate in the United States isn’t good for our friends in the Far East. Not at all. In fact, according to Merrill Lynch, China’s economy didn’t grow at all in the last quarter of 2008. And it’s still contracting fast, ever since the start of this year

If the American and European consumers don’t loosen their grip on their wallets, the Chinese ‘miracle’ could be reversed. And the effects on the battered U.S. economy will be much worse than the impact the Asian currency crisis of 1997 had on the United States.

While Shanghai stocks haven’t yet collapsed anything close to what we’re seeing on this side of the ocean… it won’t be long before they catch up.

And now the poor Chinese sit nervously on 1.4 trillion dollars – wondering what to do with it. They buy a few factories…they cut a few deals. But they cannot readily exchange their dollars – neither for gold nor for anything else that doesn’t have a $ sign on it. As soon as they begin the trade in any substantial volume, the object of their exchange will shoot up in value…while their dollars will plunge.

The total value of all the gold ever mined is only about $4.4 trillion, for example. The United States is still the largest holder…but it has only 8,133 tons of the stuff…for a total value of $240 billion. So, if we did the math right, the Chinese could buy up all the entire U.S. gold reserve and have about $1.2 trillion left to spend.

Now, we turn to Addison for his take on Obama’s first 100 days:

“We pause, amid the bustle of today’s news, to assess the new president’s first 100 days in office. Heck, everyone else is,” writes Addison in today’s issue of The 5 Min. Forecast.

“And we figure a good place to begin is the budget resolution the House passed yesterday. All $3.5 trillion of it. Complete with revenues only half that number.”


“The resolution comes complete with projections of spending and revenue out to the year 2014, by which time the deficit will be whittled down to a ‘mere’ $523 billion. Which is actually less than the White House’s projection of $749 billion. Hope springs eternal.”

And back to Bill, with more thoughts:

The rally is on! The Dow rose yesterday – up 168 points. Gold rose $7 – to close at $900. Oil is above $50 again, but just barely.

We repeat ourselves: one of the surest things in the investing world is a rally after a major downturn. Typically, prices recover 20% to 50% of the previous decline. Then, there is another leg down.

At first, when the rally comes, investors are hesitant. They’ve just lost a lot of money. They don’t trust the market. They wait. Then, as prices rise more, they begin to pay careful attention and wonder: is it time to get back in? Gradually, more and more commentators answer: yes. And so the money comes back into the stock market. A trickle at first. Then, a flood. Prices rise…and the financial press talks about a new bull market.

But if it is a real bear market, this is just a way of bringing naïve investors back into the market so they can be destroyed. Prices fall again…to a much lower level. Often, this process is repeated several times before the real bottom comes. And by then…nobody cares.

Gold traded over $800 an ounce in the early ’80s. Stocks, then at a major bottom, declined to the point where the Dow was also in the 800s. For one ounce of gold, you could have bought the entire group of Dow stocks.

Back in the early 30s, a similar thing happened. At its lowest point, the Dow fell to 41 on July 8th, 1932. Then, it took 2 ounces of gold to buy the entire Dow.

Could a similar thing happen this time? You bet it could. It now takes about 9 ounces of gold to buy the Dow. That’s already down from a high of 43, set in 1998. Back then, the Dow was over 11,000…and the price of gold was only $260.

Since then, our ‘Trade of the Decade’ has been to sell the Dow and buy gold. But the decade is not quite out…and the trade still has some juice left in it. We could easily see the Dow below 5,000 in the next downward move. That alone would put gold in the 5 or 6 oz/Dow range. Keep waiting and it should eventually get to 1 or 2 ounces per Dow – perhaps at about 4,000 on the Dow…and $2,000 for gold.

Poor Ireland. It is expected to decline by 8% this year. And a think tank warns that the decline might rise to 14% of GDP by 2010. Soon, the ships will be leaving Dublin harbor again…bound for faraway places…and laden with huddled masses, yearning for a job. They will go to Sydney, to Baltimore, and to Buenos Aires…just like they did in the 19th century…filling the world with another great Irish diaspora, singing their sad songs and telling their sad tales…and dreaming of Erin’s isle, without rain.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning